Build, baby, build? Not without serious property tax reform
YIMBYs are right about planning reform, but we must also urgently tackle our broken property tax system to beat the housing crisis, writes Mitchell Palmer
It’s no secret that the UK has a housing crisis. For every 1,000 residents, England has only 441 dwellings, compared to 517 on average in the EU. Last year, fewer than 5,000 homes were started in all of London. This chronic undersupply has driven average UK house prices to nine times the average income, locking a generation out of home ownership and undermining economic growth.
At long last, our political elites seem to be waking up to the seriousness of this crisis. In fact, across the political spectrum, YIMBYism is in vogue.
At the Labour conference, newly appointed housing secretary Chris Reed got the rockstar treatment, greeting queues of fans lining up for him to sign dusty red ‘build baby build’ hats. Labour are banking on unlocking new houses and infrastructure as part of their mission to get Britain growing.
On the right, the glitzy launch of Conservative YIMBY earlier this summer signalled a clear shift in tone. The Conservative movement is realising that any electoral recovery necessitates a plan to get Britain building.
The YIMBY conversation almost invariably – and rightly – circles back to the flaws of the Town and Country Planning Act. Fixing Britain’s sluggish economy certainly starts with dismantling our antiquated planning regime. This system subjects essential new development to a costly, time-consuming and uncertain decision-making process, making any physical investment far riskier than it should be.
However, given the much-maligned state of UK planning, it is remarkable how much we let our tax system off the hook. The UK has some of the most punitive taxes on property and development of any major economy.
UK has highest property taxes in OECD
Whilst the Tax Foundation’s latest International Tax Competitiveness Index exposes the flaws of Britain’s overall regime, placing it a shocking 32nd out of 38 OECD countries, it exposes just how punishing Britain’s tax system is for those who build. The UK’s property taxes rank a dismal 37th out of 38 OECD countries.
This is hardly surprising. The UK’s property taxes are the highest in the OECD at 2.6 per cent of the capital stock – over six times the OECD average of 0.4 per cent. Because these taxes are levied on the value of both land and improvements (i.e. buildings themselves), they function as an additional tax on construction.
What’s more, Britain imposes uniquely hostile tax rules on business investment in new buildings. British companies can only write off 39 per cent of the cost of new industrial buildings against their taxes. This compares to 100 per cent in the United States, Estonia and Latvia, and an OECD average of 49 per cent. Even worse, the UK doesn’t allow any capital allowances at all for new residential buildings in corporate ownership.
This cocktail of disruptive taxation makes new construction, whether that’s business infrastructure or homes, significantly less attractive in Britain. It also helps to explain why, since 2010, the UK has had the second-lowest average rate of investment in the OECD despite a fairly average corporation tax offering.
These excessive taxes undermine the government’s stated aim to back builders, not blockers. While comprehensive planning reform is essential, the upcoming Budget provides a good opportunity to tackle the tax side of the equation, where political hurdles are perhaps lower. After all, NIMBYs are far less likely to object to a tax cut!
Planning isn’t our only property problem
To her credit, Kemi Badenoch’s proposal to abolish Stamp Duty Land Tax (SDLT) is eminently sensible. Economists agree that Stamp Duty is one of the most destructive taxes on the books. It traps older people in big, empty homes and prevents younger workers from seeking out new opportunities, hindering national productivity.
ASI modelling suggests that abolishing SDLT for primary residences could enable 349,000 extra home sales each year, with the resulting economic activity going a long way to covering the forgone revenue.
But, if we’re serious about building, we can and must do more. Improving the generosity of investment allowances for new buildings, bringing them closer to the 100 per cent relief offered by our international competitors, would go a long way to stimulate construction. Rebalancing Council Tax and Business Rates so the burden largely falls on the unimproved value of land would be similarly transformative. This would tax those who hold underdeveloped land, rather than penalising those who invest to build on it.
Yes, we need to reform the UK’s planning regime, but we must also urgently tackle our broken tax system. Our tax code creates a host of perverse, silent incentives absent from the current YIMBY conversation. Only by dismantling both the legal blockers and the financial disincentives can we truly unlock the building boom that Britain desperately needs.
Mitchell Palmer is an economist at the Adam Smith Institute and a former ministerial advisor to the New Zealand government